4 Ways to Avoid Small-Business Bankruptcy

When a small business hits hard times and can’t recover, its owner may want to consider filing for bankruptcy, especially if the enterprise has significant debt. But bankruptcy is generally considered a last resort, and it only makes sense in certain conditions.

Jim Rudnicki, president of Rudnicki & Associates, says that bankruptcy is usually a bad idea for small businesses. Instead, he advocates either revamping the business so it can succeed or, when that’s not possible, pursuing out-of-court alternatives.

“You can turn around a failing business if a viable core still exists, there’s enough cash flow to support the turnaround process, and key employees are willing and able to do what’s required,” he says.

Rudnicki, who specializes in business revitalization, offers these four tips for saving a struggling company and avoiding bankruptcy:

1. Find more cash. This may sound like a statement of the obvious: If cash was plentiful, the business wouldn’t be failing. But Rudnicki points out that without the minimum amount of capital needed to stay afloat, efforts to recharge the business will prove futile. “Without [enough money], you’ll likely be so overwhelmed that you won’t be able to identify and address the root causes [of the problem],” he says. In the early stages of struggling, you might be able to borrow the money or convince investors to step up. Or, Rudnicki adds, it’s more likely that “to be successful you’ll have to liquidate some non-core part of the business or squeeze cash out through tighter management of the balance sheet.”
2. Make a management change. A struggling business probably needs new people and new ideas to evolve. “All of us are creatures of habit to at least some extent,” Rudnicki notes. “For the turnaround to be successful, there will need to be a change in management, or at least a willingness to truly admit that business-as-usual cannot continue.” This can require honest and sometimes tough decisions, but without the right people in place the chances for improvement are markedly lower.
   
3. Hire a consultant. Real change can be difficult, especially when the management team is “me, myself, and I.” Consider hiring a consultant who specializes in revitalizing failing businesses. As a starting point, Rudnicki recommends the Turnaround Management Association, which certifies experts in the field (like Rudnicki). An outside expert with a fresh perspective can help solve a viable business’s problems without necessarily requiring the owner to hire a new management team.
4. Consider an Assignment for the Benefit of Creditors. “Some businesses fail because they no longer serve a purpose for a large enough customer base, so there’s really no reason to invest the time and energy trying to develop and implement a turnaround plan,” Rudnicki says. “It’s simply better to liquidate them and move on to a more beneficial endeavor.” In that case, there are out-of-court alternatives to bankruptcy. Rudnicki points to the Assignment for the Benefit of Creditors, or ABC, as an example. ABCs vary by state, but ultimately they represent a liquidation process that the American Bar Association [PDF] says is “structured to save time and expense in concluding the affairs of an insolvent company.” In Rudnicki’s home state of Illinois, “going through an ABC has been shown time and again to be a cheaper and faster alternative to a Chapter 7 [filing], resulting in a larger distribution to creditors,” he says.